Canada's 'housing bubble' deemed close to bursting

[geotag277]

Originally Posted by milomilo

Are you comparing like for like? I wasn't aware you could rent an average home comparable to something you'd spend $500,000 on, for $1000 a month. Definitely not in my experience.

To answer both you and Wentworth, I am not comparing like for like, but comparing a price-conscious renter versus an average home owner.

The point illustrates how overpaying for housing can set you back potentially millions in liquid assets over a 30 year period.

Edit: Should also point out my numbers are assuming today's historically low interest rates hold for the next 30 years. That is by all accounts an unreasonably favourable advantage to owning a home, and it is still a reasonable estimate that renting comes out ahead by millions.

[lio45]

Originally Posted by geotag277

To answer both you and Wentworth, I am not comparing like for like, but comparing a price-conscious renter versus an average home owner.

The point illustrates how overpaying for housing can set you back potentially millions in liquid assets over a 30 year period.

Edit: Should also point out my numbers are assuming today's historically low interest rates hold for the next 30 years. That is by all accounts an unreasonably favourable advantage to owning a home, and it is still a reasonable estimate that renting comes out ahead by millions.

Well, yeah, duh, because you're comparing a smart/miserly renter with a dumb/spendy home owner!

In other breaking news, always having a nearly-new luxury vehicle in your driveway during your career "can set you back potentially millions in liquid assets over a 30 year period" compared to having a 20-years-old rusted beater, etc.

And you've also used the word "overpaying", which by definition is ALWAYS financially bad -- it's a circular argument. The statement "Overpaying for X is not the best choice from a strictly financial standpoint if there are other viable options" is a truism, whatever X is.

A renter who'd have put all his money into Nortel stock (grossly overpaying for it during the tech bubble) would not have been ahead compared to a homeowner who wouldn't have any savings left to invest because they went into the cashdown for the house...

I will correct you and we will all agree: if one chooses sacrifice over indulging, then yes, one will likely be financially ahead later in life. That includes obviously your case of renting a closet to ascetically live in versus buying a sprawling McMansion.

For nearly a decade, I basically lived in the cupboard under the stairs at my parents' place, spending nearly nothing (most of my social activities were quite cheap and outdoorsy, and I don't need much generally), driving an old beater car (many of them were acquired only marginally above junkyard prices), while working hard on our industrial contracts and using the proceeds to buy commercial buildings one after another in downtown Sherbrooke because I had the feeling they were unusually cheap at the time. I had my eyes set on the long term, but it obviously involved sacrifice.

If you compare two scenarios, they have to be apples to apples... I wouldn't blame someone who'd say he can't live like I did for years

[geotag277]

My my how the conversation has changed. Originally we are talking about how housing was such an awesome investment, and now it is being compared to high end sports cars in terms of over indulgence. How the context of the conversation can change in a few short posts.

To be clear, I am not exactly making a ridiculous comparison. I was compared the average house to a price conscious renter - not some super luxury mansion with a hole in the ground. Even if we compare "apples to apples", with property taxes, maintenance, and other associated costs with owning, investing in an index fund like the S&P 500 can still come out hundreds of thousands ahead simply by renting. Hard to measure opportunity costs in these cases, as it frees up capital over a 30 year period, and also frees up time owing to not having to worry about home maintenance - hard to really put a price on either.

[whatnext]

Ironic considering how central banks' failed low interest rate policies contribute to the problem:

Bank of Canada Governor Stephen Poloz says recent home price gains in the red-hot Toronto and Vancouver markets are unsustainable, increasing the probability of an eventual correction.

Economic “fundamentals” don’t justify a continuation of recent price gains in those two cities, Mr. Poloz warned in a statement accompanying the central bank’s twice-yearly review of risks buffeting the Canadian financial system....
http://www.theglobeandmail.com/report-on...financial-system-review/article30363984/

Ottawa — The Trudeau government was accused Wednesday of foot-dragging after Finance Minister Bill Morneau said his department is still weighing evidence on the role of foreign buying in Vancouver’s housing affordability crisis.

“If you are in Vancouver today, it’s challenging for people to think about how they can get into the market and how their children can get into the market,” an empathetic Morneau acknowledged at a Toronto conference.

But he said his officials are still in the process of doing a “deep dive” as they study the role of foreign investors in the skyrocketing prices.

“As we get at the challenge of around whether there are foreign ownership issues, we need to consider the evidence,” he said...
http://vancouversun.com/news/local-news/...wnership-issues-in-vancouver-real-estate

[eternallyme]

Simple, Mr. Poloz, raise interest rates! I thought the 2015 rate cuts were stupid, and they still are - all they did was inflate a bubble even more.

[lio45]

Originally Posted by geotag277

My my how the conversation has changed. Originally we are talking about how housing was such an awesome investment, and now it is being compared to high end sports cars in terms of over indulgence. How the context of the conversation can change in a few short posts.

To be clear, I am not exactly making a ridiculous comparison. I was compared the average house to a price conscious renter - not some super luxury mansion with a hole in the ground. Even if we compare "apples to apples", with property taxes, maintenance, and other associated costs with owning, investing in an index fund like the S&P 500 can still come out hundreds of thousands ahead simply by renting. Hard to measure opportunity costs in these cases, as it frees up capital over a 30 year period, and also frees up time owing to not having to worry about home maintenance - hard to really put a price on either.

But it's also hard to put a price on enjoying a private place to raise your kids (with a backyard, etc.) that you control (no risks of rent increases or eviction) and that you can modify to suit your tastes at will.

I agree with you though that many people seem to have a exaggerated opinion of real estate investing -- the obvious truth is that it's definitely not all purchases that will, all the time and in all markets, beat the stock market combined with renting.

Generally, though, owning at least your place (and, ideally, underpaying for it) is a good way to diversify your stock portfolio, and I would recommend it in most cases, unless you're in a market that really is biased in favor of renting (like Van).

[Antigonish]

Bank of Canada issues stern warning on Toronto, Vancouver housing markets. Cue housing bubble deniers in 3..2..1..

http://www.ctvnews.ca/business/bank-of-c...onto-vancouver-housing-markets-1.2938420

[geotag277]

Originally Posted by Antigonish

Bank of Canada issues stern warning on Toronto, Vancouver housing markets. Cue housing bubble deniers in 3..2..1..

http://www.ctvnews.ca/business/bank-of-c...onto-vancouver-housing-markets-1.2938420

Home prices increased 30% in Vancouver and 15% in Toronto on a year over year basis. All he is saying is that kind of price growth is unsustainable, which is rather obvious.

It isn't really considered a bubble when prices have the possibility of going down by some amount at some point in the future. With Toronto now hitting development limits on single family detached homes that Vancouver hit twenty years ago, I don't expect that particular segment is particularly at risk, but condos and multi family might be - and that isn't necessarily a bad thing to balance future affordability:

http://www.theglobeandmail.com/report-on...igh-risk-zone-rbc-warns/article30182784/

[cornholio]

Originally Posted by geotag277

Home prices increased 30% in Vancouver and 15% in Toronto on a year over year basis. All he is saying is that kind of price growth is unsustainable, which is rather obvious.

It isn't really considered a bubble when prices have the possibility of going down by some amount at some point in the future. With Toronto now hitting development limits on single family detached homes that Vancouver hit twenty years ago, I don't expect that particular segment is particularly at risk, but condos and multi family might be - and that isn't necessarily a bad thing to balance future affordability:

http://www.theglobeandmail.com/report-on...igh-risk-zone-rbc-warns/article30182784/

When Poloz speaks one needs to read between the lines. He said very clearly that we have a growing speculative bubble in some of our markets.

“Self-reinforcing expectations” are fuelling both a price runup and increasingly risky borrowing by some buyers, the central bank said in its twice-yearly assessment of risks buffeting the Canadian financial system.

Speaking to reporters later, Mr. Poloz said price rises in those cities have “gone beyond fundamentals,” such as job growth, incomes and immigration.

“This suggests that prospective home buyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” Mr. Poloz said in a statement.

The reality for Mr. Poloz is that trying to cool the real estate market with words is the only effective tool he has, given the wide regional variations. Prices in Vancouver, Toronto and the surrounding areas are still surging, while they’re falling in the provinces hit by the oil price slump, and stable most everywhere else.

“He explicitly told Canadians: ‘Don’t buy your home on the expectation of house price appreciation.’ To me, that is a very clear signal that he’s trying to restrain housing behaviour,” said Frances Donald, a senior economist at Manulife in Toronto.

Over the past several weeks 3 of the big 5 banks have had senior executives say worrying things. Even Trudeau has now weighed in. Things are starting to move quickly. Yellen in the US is still saying all the right things to indicate another rate rise this month or next month. Interesting times.

Also the rest of the world is starting to take notice. This was interesting, mostly because they don't care about Canada but decided to spend a significant amount of time on Vancouvers speculative bubble.
• Video Link

[kwoldtimer]

So when the Governor of the Bank of Canada and other leading lights tell people not to buy a SFH in Vancouver, does anyone actually take heed? I imagine it's no biggie for many foreign purchasers and for those with fully paid-for homes, but how about those most at risk, i.e. the ones taking on big mortgages?

[Jaws]

Originally Posted by eternallyme

Simple, Mr. Poloz, raise interest rates! I thought the 2015 rate cuts were stupid, and they still are - all they did was inflate a bubble even more.

So what happens to the Canadian economy? Cheap credit is far more than just mortgages. Econ 101. It's not close to being simple.

[whatnext]

Originally Posted by Jaws

So what happens to the Canadian economy? Cheap credit is far more than just mortgages. Econ 101. It's not close to being simple.

Low interest rate policies around the world have been a failure. Their overuse have deprived central banks of an important tool that should only be used in emergencies. We're long past the Great Recession of 2008, it is long past time to regularize interest rate policies.

[geotag277]

Originally Posted by whatnext

Low interest rate policies around the world have been a failure. Their overuse have deprived central banks of an important tool that should only be used in emergencies. We're long past the Great Recession of 2008, it is long past time to regularize interest rate policies.

Low interest rates benefit borrowers, which is the vast majority of people. High interest rates benefit lenders, which is the vast minority of people.

There is absolutely no reason for the average individual to prefer high interest rates over low interest rates. Taking out a mortgage with higher interest rates for example is essentially burning your money, flushing it down the toilet, having it disappear into the ether into the coffers of banks.

Banks have total control of the interest rates they will offer to customers. If they feel lending is too risky, they can set their mortgage rate to prime + X%.

Having widespread interest rate increases across the board will not benefit the average Canadian. There are other ways to address a sustainable housing market.

[Berklon]

Originally Posted by geotag277

There is absolutely no reason for the average individual to prefer high interest rates over low interest rates. Taking out a mortgage with higher interest rates for example is essentially burning your money, flushing it down the toilet, having it disappear into the ether into the coffers of banks.

Yea, except those historically low rates have pushed housing prices into hugely un-affordable levels and continues to result in debt levels breaking records every year. It's basically allowed people who really have no business purchasing a home to do so anyway.

Hooray for paying an extra 300K+ on a home!

Originally Posted by geotag277

Having widespread interest rate increases across the board will not benefit the average Canadian. There are other ways to address a sustainable housing market.

So how else can this be addressed?

[geotag277]

Originally Posted by Berklon

Yea, except those historically low rates have pushed housing prices into hugely un-affordable levels and continues to result in debt levels breaking records every year. It's basically allowed people who really have no business purchasing a home to do so anyway.

In terms of managing debt risk for the average Canadian buying houses, that falls on the banks actually doing the lending. You walk into a bank and expect to take on a mortgage with servicing costs equal to 50% of your income you will generally be laughed out of the bank. It could be argued that banks lending in Vancouver are taking on additional risk, but you could also argue that risk is diversified against other markets such as Calgary and Montreal which don't have the same high average mortgage servicing costs.

In terms of people taking on loans they can't handle, it's called personal responsibility and if they default they will be paying for it for a lifetime through ruined credit.

So how else can this be addressed?

Banks can easily stop lending to people with mortgage servicing costs approaching 50% of income, which will prevent people from being able to buy these homes in the first place. Banks can also increase their mortgage rates (without increase prime) to reflect the additional risk profile of higher debt loads.

Finally, we can simply build more. There have been numerous reports in this very thread that indicate there is significant multi family absorption risk in every Canadian market, including Toronto and Vancouver. This situation will put downward pressure on prices. We can provide incentives to developers to continue developing even in environments that don't see perpetually increasing prices. In essence this is the only way out for markets like Vancouver and Toronto who have no more space to build more single family homes.

[casper]

Originally Posted by geotag277

....Finally, we can simply build more. There have been numerous reports in this very thread that indicate there is significant multi family absorption risk in every Canadian market, including Toronto and Vancouver. This situation will put downward pressure on prices. We can provide incentives to developers to continue developing even in environments that don't see perpetually increasing prices. In essence this is the only way out for markets like Vancouver and Toronto who have no more space to build more single family homes.

Exactly. We need to remove many of the zoning limits that are stopping developers from building higher and larger buildings. In stead we should put in place zoning requirements that require a certain percentage to be three bedroom and minimum height requirements.

[Xelebes]

Originally Posted by geotag277

Low interest rates benefit borrowers, which is the vast majority of people. High interest rates benefit lenders, which is the vast minority of people.

True. It would be a boon if those low interest rates resulted in new stock and product, but that isn't exactly happening. Especially in low interest rate environments like right now, real eastate is not increasing and is experiencing inflation that beats other product: consumibles, capital investments and so forth. Poloz is expressing considerable alarm because the numbers he is seeing is showing that the price of housing is choking out other sectors of markets.

The recession of 2008 is eight years ago but I have previously noted that this recession does not look like the Great Depression but the Long Depression of 1871 to 1896. Boom and bust cycles were very devastating during the Long Depression in North America and Europe.

[whatnext]

Originally Posted by casper

Exactly. We need to remove many of the zoning limits that are stopping developers from building higher and larger buildings. In stead we should put in place zoning requirements that require a certain percentage to be three bedroom and minimum height requirements.

Um, wrong. This was posted upthread, apparently you didn't read it:

...Consider the claim that it’s “all about supply.” This claim suggests that we are not building enough new housing to meet the demand from a growing population. But is there any evidence of that? No. In fact, the ratio of population to housing units in Greater Vancouver has been falling for the past 20 years or so. Even the UDI said in a late 2015 report that housing starts were in the “healthy range” given population growth, and had been for several years. And housing starts have surged recently, to their highest point in over 25 years, even while net migration (international and domestic) into Vancouver has declined somewhat in recent years....

http://www.theglobeandmail.com/report-on...-its-not-a-supply-issue/article30380106/

[geotag277]

From the very report that the article is based on ^

Notice one of those lines is not like the other? Apartments and attached have remained relatively flat while there is one obvious run away train. By building like crazy Vancouver has kept those two categories in check, and building must continue.

I notice in the article is also tries to paint this picture that everyone who thinks we need to build more is against foreign capital controls, and everyone who thinks we need to do something with foreign capital controls thinks we don't need to build more.

This is why the political situation in Vancouver is at an impasse. This false dichotomy "there is one silver bullet and we have to ignore the rest" mentality. In reality, Vancouver needs to be doing everything. And yes, building, rezoning, land use policies to promote family development, lower cost development, non-luxury development, etc. is a key part of it.

[ssiguy]

That graph is soooooooooo 2015. The SFH is up $400k

As far as Vancouver/Province should be doing a lot of different things all at once to stop the housing frenzy explains exactly why none of them will ever get done.